Akamai To Become The Primary CDN For Netflix, But At A Very Low Price

While Netflix has always had a dual-vendor approach for their streaming delivery by using CDNs Limelight and Level 3, in the beginning of the year Netflix continues to move away from Level 3 and will be taking just over half of their traffic to Akamai. While this is clearly good news for Akamai, the price point at which Akamai is charging is the lowest price I have ever seen the company offer.

We've all known that for the past two quarters, Akamai has been getting aggressive on pricing with their M&E business and lowering pricing to win or retain customers. But this latest round of Akamai pricing shows just how much they are now willing to compete with Limelight and Level 3 and in many cases, are looking to price business at levels they know the other CDNs can't or won't match. While they are finally acting like they now want to own the CDN market outright and keep their competitors from growing, the flip side is they are now the single biggest company driving down CDN pricing in the market. What use to be Limelight and Level 3 driving pricing down, has now been replaced by Akamai offering pricing that is well below what the others offer, on many large deals.

Lately, Akamai has been giving some large companies like Netflix a very discounted rate if the customer agrees to give Akamai at least 51% of their traffic. In exchange, Akamai offers the content owner a highly discounted rate for three of four months as an incentive. In this case, Netflix is paying Akamai about one and half cents per GB delivered for a couple of months before Netflix's pricing goes back to about six cents per GB delivered. At a penny and half, that's about 3x cheaper than what Limelight charges Netflix and is at a price that Limelight simply can't match. While I'm hearing that Netflix just renewed their contract in the new year with Limelight, one has to wonder what Limelight would do in 2011 if Akamai keeps their pricing at this level.

One way to look at this is that Limelight has a little less of Netflix's traffic, but at a higher price which should mean they can make more money from it. Akamai on the other hand has more traffic, but at a greatly reduced price point which means they can only make money from getting a lot more traffic, or by having a lower internal cost than Limelight, something we don't know when it comes purely to their CDN business. Akamai's thinking has to be get the M&E business it in the door at all costs so they can drive volume on the network and have a chance at upselling customers to higher margin products. Essentially, CDN can be a loss leader for Akamai if it had to be in order to act as the catalyst to grow their value ad services business. The real winner in this case is Netflix, which continues to drive down their cost of streaming movies.

Akamai is clearly making some really aggressive moves in the market right now and is looking like a company that really wants to once again dominate the CDN space. While many have been talking for the past 18 months about all kinds of other companies that are going to enter the CDN space, or compete with the leaders in the CDN space, it's very clear that the race is still between Akamai, Limelight and Level 3 for the largest portion of the CDN market.

Great report Dan.
Any idea if the NetSession Interface (ie. P2P) is or will eventually become part of Akamai’s services provided to Netflix?

http://www.BusinessOfVideo.com Dan Rayburn

Honestly, I don’t know. Akamai has never spoken about P2P or what/when they plan to do something with it. Doubt it would be used for Netflix though as it would probably require another download/app which I don’t see Netflix wanting to push on consumes.

Joe Flood

This simply looks like an attempt by Akamai (a good one) to retain a great brand name in video download (the best CDN customers) But how can they with other customers get pricing down when they will always have overhead costs of bandwidth, colo etc.. Verizon announced a while ago preferred pricing for CDN’s so are they so low that this is still a profitable deal for Akamai?

http://www.BusinessOfVideo.com Dan Rayburn

Whether or not Akamai can make money or even break even at a penny and a half is the ultimate question. But until they are willing to answer it, specific to CDN, we just don’t know.

Kevin

“Netflix is paying Akamai about one and half cents per GB delivered for a couple of months before Netflix’s pricing goes back to about six cents per GB delivered. At a penny and half, that’s about 3x cheaper than what Limelight charges Netflix and is at a price that Limelight simply can’t match. While I’m hearing that Netflix just renewed their contract in the new year with Limelight, one has to wonder what Limelight would do in 2011 if Akamai keeps their pricing at this level.”
I’m a little confused by this. You say that 1.5 cents is 3 times cheaper than Limeight. That would put Limelight at 4.5 cents. You also say after a few months that the price with Akamai will go up to 6 cents which is 1.5 cents more expensive than Limelight.
So specifically here..
“one has to wonder what Limelight would do in 2011 if Akamai keeps their pricing at this level.”
Are you saying you wonder what Limelight will do if Akamai keeps their price at 6 cents while Limelight is already only getting 4.5 cents? Or am I missing something there?

http://www.BusinessOfVideo.com Dan Rayburn

What I am saying is that the only way Akamai got in the door here is by offering such a low “promo” price for part of the contract term as long as they got at least 51% of Netflix’s traffic. Just that “promo” price alone allowed them to get into a customer that for years was using a competitor. While Akamai’s blended CDN price is about the same as Limelight’s when adjusted over a 12 month period, Akamai is clearly showing Netflix they are willing to undercut the other CDNs. And just imagine what that means when it comes time for Akamai to get Netflix to renew their contract. The pricing will no longer be four and half cents.

Joao Pinto

Dan, as always very interesting post. I can’t comment, but let me ask you a few questions.
1) You write you don’t know the internal cost of AKAM and LLNW. However, you know very well what the architectures of each are, and how very different they are – also in terms of cost impact. Based on that, who would you say should (!) have the lowest internal cost per GB delivered?
2) Given you don’t know the internal cost, what is the basis of you writing “At a penny and half, that’s … at a price that Limelight simply can’t match.”?

Justin

Hey Dan great article. Do you know how long AKAM has been NFLX’s CDN? Trying to determine if this is incremental to AKAM or totally new revenue

Kevin

I don’t know how much Akamai was delivering in the past, but they have been delivering video for at least 6 months to a year. Also the images and small objects on their website switched from Limelight to Akamai for me maybe 3-5 months ago.

shaun noll

thanks Dan, great info. Will be very interested to see what AKAM and LLNW’s gross margins look like next quarter and I’m SURE questions about this post will come up during the Q&A on their earnings calls.
Great blog!

http://www.BusinessOfVideo.com Dan Rayburn

@Joao:
1. I don’t know who has the lower cost. Each CDN has a very different architecture. There is no way to know, based on the data I have or that’s presented by the companies to the market what the cost structure looks like.
2. I have spoken to Limelight about some of their general pricing practices in regards to all customers and they have made it clear they won’t price down at a penny or two.

Harry

What I don’t understand is…Don’t these customers (like Netflix) sign non-disclosure agreements with their vendors ?
Aren’t they violating their NDA’s by sharing this information with you Dan? If I were an Akamai or a Limelight I’d be pretty pissed right now…

Bettieclaire

It’s simply looks like an attempt by Akamai (a good one) to retain a great brand name in video download (the best CDN customers) But how can they with other customers get pricing down when they will always have overhead costs of bandwidth, colo etc..

http://www.BusinessOfVideo.com Dan Rayburn

@Harry: Yes, most customers sign an NDA but they talk pretty openly about their pricing when they call me asking for help on what the going rate is the market it. But the CDNs know this very well and most customers play the CDNs off one another to get the best pricing, so it’s a well known practice in the industry.
Also, you don’t know who I spoke to in regards to this specific post so you might be assuming things that are not accurate.

Kevin

This makes me wonder about Level3. It seems a year or two ago Level3 was making a lot of headlines in the CDN space and nabbing big customer such as Netflix. Then a while ago you made a post (without looking back at it) that said something to the extent that Level3’s CDN was moving away from the startup type atmosphere and getting thrown in with the large telco atmosphere. After that there hasn’t been much at all about Level3’s CDN out there. The press releases about nee customers stopped, you stopped writing about them, etc.
So what I’m getting at is what is going on with Level3’s CDN? Why did they lose some or all of Netflix’s business? Now that they are more integrated with the big telco mindset have they become to slow to respond to customer needs? Since they so quickly built up their CDN based on rock bottom prices has they since stopped offering such rock bottom prices? Have there been performance issues with them?
Any insight on Level3’s CDN happenings?
Thanks.

http://www.BusinessOfVideo.com Dan Rayburn

Hi Kevin, Jim Crowe, CEO of Level 3 will be one of the keynote speakers at the CDN Summit in NYC on May 10th. http://www.cdnsummit.com
So we’ll hear a lot more about what they are doing shortly. But I do agree with you, they have been quiet as of late.

Nicholas

Hi, great article – that’s really good info to know!
Here’s a question: does anyone have any idea what sort of scale 51% (or 100%, for that matter) of their traffic is? I’m just curious what sort of scale is required to get into those pricing tiers.

Daily posts by Dan Rayburn about the online video industry, business trends & analysis, market data & research as well as the online video business models in the media & entertainment, broadcast, advertising & enterprise industries.